Please ensure Javascript is enabled for purposes of website accessibility

What Everybody Should Know About the Current Market Decline

By Bill Barker - Feb 8, 2016 at 1:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are some stark contrasts between the current market environment and the environment in 2008.

"Sell the house. Sell the car. Sell the kids."
--Colonel Kurtz, Apocalypse Now

Two headlines dominated coverage of the markets on the day I wrote this. One was the continued decline in the price of oil. The other was a report out of the Royal Bank of Scotland that advised investors to "Sell Everything." Actually, the media coverage that I caught largely glossed over the fact that, technically, the report advised investors to "sell (almost) everything." Certain government fixed-income investments were excluded from the broad mandate.

The report itself is well written and is not a panic screed, so it would be a mistake to demonize it or its authors as being patently unhelpful to investors. Still...sell everything?

The report points to the large array of macroeconomic data that could be troublesome for the pricing of equities: troubles in China's growth rate; a bearish picture for global commodities in general, and oil in particular; too much debt in the world; and a long-term outlook that automation will destroy 30% to 50% of all jobs in the developed world -- all of which (plus many other macroeconomic factors) the report sees as leading to a risk of a 10% to 20% drop in the markets.

Now, it might be argued that the equity markets are already down 10% to 20%, depending on which index you choose to measure; emerging markets and domestic small caps are already at or nearing 20% declines. But the report, I assume, is anticipating further declines of the same magnitude. The report concludes, in part, that "this looks very much like 2008."

The report covers many different parts of the world, but I'd like to discuss whether market conditions here in the U.S. look anything like they did in 2008. First, on equity valuations, yes, they do. At the end of June 2008 -- just before all hell broke loose a couple of months later -- stocks in the S&P 500 were trading at 18.36 times operating earnings. Stocks in the S&P today are trading at about 18.6 times trailing earnings. Those figures, by the way, are both essentially the average multiple for operating earnings over the past 27 years; 18.66 is the average multiple for domestic large caps over that time period. It is worth remembering that in 2008, stocks did not plummet from an especially out-of-whack valuation range, which distinguished that bear market from the one that followed 2000, a time of extreme valuations.

But the general state of the U.S. economy bears little resemblance to what we were looking at in 2008. How was employment doing in the first half of 2008, for example? Well, the economy was shedding jobs, averaging about 50,000 a month in the first half of 2008. Today, the economy is seeing around 200,000 new jobs a month on average, though the most recent months have been much stronger than that -- closing in on 300,000 a month -- and the unemployment rate has plummeted to 5%, with the labor force participation rate improving as well.

Home prices experienced double-digit year-over-year declines each month in the first half of 2008, escalating as every month went by. Today, home prices are rising. And the decline in home prices probably had more than a little to do with the fact that housing starts in 2008 were coming to a screeching halt, declining by 30%. Again, home starts today are on the rise.

Retail sales numbers were down every month in the first half of 2008 as well. There was, in short, no limit to the number of obviously bad trends in the economy.

As I wrote a couple of months ago, the so-called Misery Index -- a combination of the unemployment and inflation rates -- has not been lower in this country for 60 years. While it is likely that we will start seeing some more inflation soon, it is not likely that it will be great enough to take the Misery Index out of an extremely good range. The housing market appears largely healthy, though if interest rates rise dramatically (in a way nobody currently expects), that would obviously hurt the housing market. If, as the RBS report states, 30% to 50% of jobs will eventually disappear, then they sure aren't disappearing from the U.S. economy at the moment. Jobs are growing at what appears to be a healthy clip.

In short -- and I limit this observation to the domestic economy -- there are a lot of differences between 2008 and 2016. And the United States is where all the problems began for the global economy in 2008.

It's important for investors to focus on the benefits of long-term stock ownership. This necessarily includes exposure to market declines of 10%, 20%, and even more, along with the expectation, borne out by history up to this point, that markets tend to recover over time and reward those who hold on to well-diversified stock portfolios through the inevitable declines. I don't advise trying to time the market today, and I haven't advised it in the past. I don't expect that those who do try to time the market will see any more success than they have in the past -- which is to say, very little.

The declines in today's market are leading to some more appealing prices for quality companies than I've seen in a while. Rather than sell everything, or almost everything, investors would do well not to let their emotions get the best of them.

But be alert
No matter where or how you invest, it's always important to control your costs. That's why my team recently produced a new special report uncovering a number of "hidden costs" you might not normally consider. It's absolutely free, and you can access it by following the link here.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.